Monday, August 1, 2011

Rebuilding the Big Red Machine: Step 3 (Part 1)

It's a simple, straightforward question, but one that has a surprisingly complicated and elusive answer. And, even determining the answer will require some heavy lifting on our part, but player valuation is a key part of effectively and efficiently operating an MLB franchise, so it's probably worth a bit of our time. So, let's get to it.

If you've been around the block once or twice, you've probably heard the old axiom that something is worth "whatever someone will pay for it." And, of course, on a certain level that is true. However, baseball economics do not precisely reflect the realities of markets driven by pure market forces.

Baseball is not a purely competitive market, as each team is a member of a league. As a result, there is an inherent element of cooperation in the baseball marketplace. Unlike a pure competitive market, the Yankees are prevented from running the Kansas City Royals out of business. Not to mention, they would not benefit from doing so. In a non-cooperative market, competitors benefit from running their competition out of business, as it creates an opportunity for the surviving business to increase its marketshare and customer base, which bring a corresponding increase in revenue streams. But, in baseball, not many fans are going to pay the going rate for tickets to watch the Yankees play an intrasquad game. So, on a fundamental level, the Yankees need the Royals.

The fact that the Yankees can't run the Royals out of business brings about a practical reality that must be recognized in a discussion of player valuation. Namely, bad decisions aren't penalized the same way they are in a true market place. The penalty for foolishness is the loss of business. In MLB, the penalty for foolishness is a last place finish due to a pathetic Win/Loss record. Decisions in life and business are based largely on incentives and disincentives. Here, a last place finish simply isn't a strong enough deterrent to prevent organizations from making similar bad decisions in the future. So, team after team continues to throw out massive contracts driven largely by the market, rather than the value of the player to the team.

So, the obvious consequence is that bad teams are free to make bad decisions regarding free agents. And, of course, that sets the market and drives up the cost of players for rational decision making teams. Or, to put it more succinctly, the dumbest teams in the league can set the value of the players based on what they are willing to pay for them.

So, if that's how the value of a player is frequently determined, then how do rational decision makers place a more accurate, proper value on players?

Proper Valuation Strategy

Now that we've laid out the problem, we are going to attempt to address it. For a mid-market organization like the Reds to hold its own against the big market clubs, it needs to embrace efficiency. It needs to leaner and meaner. Basically, the Reds need to get significantly more units of production per dollar spent than the big market clubs. If it fails to do so, then the big market clubs will win based purely on their wealth of resources. If the Reds aren't more efficient than the competition, then the big clubs will win simply by outspending them.

So, how do the Reds get more "bang for the buck"? How do they embrace efficiency? A proper player valuation system is a key first step. In general, we are going to look to directly tie a player's on-field contributions to the revenue generated by the organization. Linking "monetary expense" to "monetary benefit" to determine the value of an asset is hardly revolutionary, but it does allow us to place a more rational value on players than we would get from relying on what the Pittsburgh Pirates are willing to pay for players. So, that's our goal in our valuation efforts. Detach the impact and influence of outside organizations on our valuations and make the determination of a player's value based on what he is worth to OUR organization. In short, a player's value to the team will be driven by the revenue and value he creates for the organization.

As difficult as it may be, the Reds need to form their own independent valuation of players and stick to it, rather than letting the market dictate player valuations to them.

To establish their own valuations of players, the Reds will need to follow certain steps, which will involve some heavy lifting on our part, but that can't really be helped. Basically, proper valuation requires the following steps:

1. Use statistical analysis to convert a player's total on-field contributions (offense, defense, positional value, etc) into a single Run value,

2. Convert that player's Run contribution into a Win value, 3. Determine a player's objective monetary value on the basis of his Win contributions, and4. Convert a player's objective monetary value into a subjective, organization specific value based on a team's position on the Win Curve and an understanding of the various layers of revenue that exist under MLB's economic structure.

Basically, to have a proper valuation, you need to know what a player is, how what he is impacts the team's W/L record, and how his Win value impacts the specific fortunes of the organization's revenue stream.So, that sets the table for what we'll be doing over the next few days, but we'll break it down into several parts in order to make it a bit more manageable.Go to Step 3 (Part 2)

About Me

Blessed (or is it cursed) to be a Reds fan. I've loved baseball as long as I can remember. Played it until they told me I couldn't anymore. Now, always thinking on it.
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